2014 (4) TMI 903 - AT - Income Tax

Deletion of disallowance of interest Debit balance maintained for short period Validity of Direction made by the CIT(A) Held that - The CIT(A) agreed that there is a commercial expediency to transfer the funds from assessee s CC A/c to SB accounts of assessee s family members with the same Bank but, the CIT(A) accepted such diversion only for short period of 10 days and he directed to disallow interest for balance period the direction of the CIT(A) is not proper - Once the CIT(A) observed that there is commercial expediency to divert the funds from assessee s account so as to oblige the request of the Bank to boost up their deposit position, the interest earned on such diversion to the accounts of family members should be the income of the assessee rather income of the family members thus, the AO is directed to bring the interest earned, on diversion of fund from assessee s CC account to the SB accounts of family members, to tax in the hands of the assessee Decided partly in favour of Assessee.

Summary

Issues Involved:

1. Disallowance of interest on advances due to alleged diversion of funds.
2. Restriction of interest allowance for advances for periods less than 10 days.
3. Security provided by individuals for obtaining loan facilities.

Issue-Wise Detailed Analysis:

1. Disallowance of Interest on Advances Due to Alleged Diversion of Funds:

The assessee, engaged in trading bullion, faced disallowance of Rs. 28,93,009/- in interest by the AO, who argued that funds borrowed for business purposes were diverted to non-interest-bearing accounts of HUF members. The assessee contended that sufficient non-interest-bearing funds were available and the advances were short-term, primarily to meet bank requests for maintaining balances. The CIT(A) noted that amounts borrowed were indeed diverted to personal accounts, but accepted the assessee's argument to exclude short-term balances from interest calculations. The CIT(A) directed the AO to recompute interest on debit balances exceeding 10 days.

2. Restriction of Interest Allowance for Advances for Periods Less Than 10 Days:

The CIT(A) restricted the allowance of interest on advances for periods less than 10 days, acknowledging the commercial expediency of maintaining balances as requested by the bank. The CIT(A) directed the AO to exclude such short-term debit balances from the disallowance calculation. However, the Tribunal found this direction improper, stating that if commercial expediency was recognized, the interest earned on such advances should be taxed as the assessee's income, not the family members'.

3. Security Provided by Individuals for Obtaining Loan Facilities:

The assessee argued that advances were secured by the individuals' immovable properties, which the CIT(A) did not specifically address. The Tribunal's decision implied that the security aspect was secondary to the primary issue of fund diversion and commercial expediency.

Tribunal's Conclusion:

The Tribunal concluded that the CIT(A) correctly identified commercial expediency but erred in limiting the interest disallowance to periods exceeding 10 days. It directed the AO to tax the interest earned on the diverted funds in the assessee's hands, ensuring justice. The appeal was partly allowed, and the order was pronounced on 4th March 2014.